Innovating The Corporation CAP 1

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Copyright © 2000. NTC Business Books. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright
Chapter 1—
The Innovation Imperative
The 1990s was the most remarkable period of U.S. economic growth in the twentieth century. America became the economic engine of the planet. Stock prices
soared beyond our wildest imaginations. As recently as 1995, few would have believed that the Dow would exceed 11,000 and that the NASDAQ would crash
through 5,000. An impossibility! That growth was fueled by innovation that created new products, services, processes, and business tools that changed the way
people lived and worked. It made people more productive and more prosperous. It made stockholders wealthier and companies stronger. In addition to the tangible
products and processes that have fueled corporate earnings, there has been the growth of an intangible spirit—the spirit of innovation. That spirit has become the new
corporate growth strategy.
Innovation Must Go On
The future can remain vibrant and dynamic, with unparalleled growth, if the United States as a country and a society develops a passion for innovation. But not if it
slips back into riskaverse, failsafe approaches to managing growth. If that happens, it will rapidly lose the competitive edge, valuation successes, and national
leadership it has enjoyed.
Evidence of the changes brought about by innovationdriven growth is everywhere. In addition to the explosion of the stock

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market to historic levels during the late 1990s (the Dow had never been over 4,000 before 1990), consider the following:
• Measurement and planning. During the last thirty or forty years, marketers' ability to measure results and target future strategies has undergone revolutionary
changes in scope and precision. ZIP codes, introduced in the 1960s, made market segmentation commonplace shortly thereafter. Scanners were introduced into
supermarkets during the 1970s, and, by the mid1980s, manufacturers were marketing at the store level. By the mid1990s, database marketing, including data
warehousing and data mining, was becoming commonplace. Some marketers have replaced mass marketing with onetoone models using more than one hundred
psychographic variables.
• Management and processes. Total quality management, justintime management, and concurrent engineering are already old news. In early August 1999, Toyota
announced that its new "virtual production line" would enable it to deliver a custom automobile within five days of receiving the order. DaimlerChrysler's response to
this announcement was that it could now achieve the same in twelve days. General Motors said that its time was seventeen days. The remarkable thing is that all of
these statements were made in the same century in which Henry Ford allegedly told customers they could have any color at all, so long as it was black. And more
remarkable still, Toyota's capability can't really be considered a serious competitive advantage.
• Motivation and people. New methods of working and organizing work, including job sharing and telecommuting, as well as new approaches to rewarding both
individuals and teams, have been contributing factors to productivity gains during the last decade of the century. In 1990, approximately four million people
telecommuted. By the end of the decade, the number was reported to be more than twentyone million.
Real sustainable growth has always been a key goal of business. And an increasingly high number of senior executives are "getting it." Although intelligent, frugal
management of resources is a necessary

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component of success, radical downsizing and costcutting usually do not produce growth. As in the past, growth and prosperity depend on the continuation of
innovation—the creation of new value through the development of new products and services. That means corporate leaders face an extraordinary challenge: if they
wish to enjoy continued economic strength, they must surpass what a few years ago was an unsurpassable goal. And if they succeed, it will be because they have
innovated, not downsized, their way to greater productivity, growth, and prosperity.
What Is Innovation?
Everyone should want to innovate. Many CEOs do. Investors certainly do. Employees want to. Customers benefit from it. Governments should encourage it. The
economy will continue to thirst for it. But what is it?
Innovation brings a new perceived benefit or value to a customer, employee, or shareholder. The key words are new perceived benefit. The benefit may be
functional, psychological, emotional, or financial. The range of benefits can be from minimal to massive. For example, a process innovation could bring a timesaving
benefit to employees. A new videophone might bring functional, emotional, and psychological benefits to a customer. And a new innovative business launch might bring
financial benefits to management and shareholders.
Furthermore, innovation does not exist in a riskfree zone, so while product and service improvements (e.g., line extensions, adaptations, and repositionings) are a part
of the definition of innovation, they are only a part. Innovation must be defined as a portfolio of high and low riskreturn endeavors and initiatives. Like a balanced
stock portfolio, corporations should define innovation as a portfolio of products, services, and processes all providing distinct benefits with varying degrees of
risk and return.
Simply put, innovation increases value to customers, employees, and shareholders. In traditional terms, it is "that which is newly introduced; a change." More to the
point, innovation is the set of

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functional skills required to conceive and develop a new product or service and bring it to profitable realization. Innovation brings genuine newness to an organization's
customers or constituencies. Further, it is a mindset, an allconsuming attitude that drives the way managers think about business strategies, process, leadership, and
structures. It is analogous to continuous process improvement in that it is an attitude that feeds on and sustains itself.
It should be easy to see that innovation thrives in an environment that uses analytical tools to measure and manage creative endeavors. Successful innovation is the
result of the deliberate assessment of market demand and a company's internal strengths and abilities to meet those demands. Success is not the result of mysterious
forces and impulses but rather the application of disciplined techniques. Like any skill, that discipline needs to be exercised to improve; the more it is used, the more it
produces a greater ability and confidence, which in turn produces a higher than normal success rate, which ultimately reinforces the mindset that produces such
success.
Types of Innovation
Innovation, like genius, is an abstraction that can take many different shapes, forms, and manifestations. As illustrated in the following example, innovation is virtually
boundless as long as a new benefit is realized and brought to fruition.
Technology tends to get all the attention, but planning (or strategy) is a tool that most consistently points the way to breakthrough new products. WalMart is a classic
example. While the company uses sophisticated buying procedures and justintime inventory tactics, it also outsmarts the competition through its choice of location
and service and appeals to customers in unusual ways. For example, while virtually all companies actively discourage overnight parking in their parking lots, WalMart
actively encourages owners of recreational vehicles to use its parking lots for overnight parking—much to the chagrin of its competitors, which subsequently have had
to scramble to show how "customerfriendly" they are.

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Another example is Continental Airlines, long considered an alsoran in the airline industry. A February 9, 1999, Wall Street Journal article reported that the airline
had become the leading operator in the New York City area. It had gained more than 3 percentage points in market share over an eighteenmonth period—an
enormous change. The airline simply made Newark Airport a hub, which enabled it to offer better and faster service to busy commuters. The strategy didn't involve a
single new piece of technology, just more of what customers wanted. Like most manifestations of innovation, it was more a matter of attitude or approach, a way of
being or looking at the world, than a matter of process.
Who Benefits from Innovation?
The short answer is everyone. The benefits that occur from innovation can be astounding. Exhibit 1.1 summarizes the benefits most commonly cited by companies that
have engaged in and been rewarded by innovation.
Exhibit 1.1 Innovation Benefits
Shareholder Customer Employee Company
Benefits Benefits Benefits Benefits
• Increased market • Customers with better • Expanded employment • Sustainable growth
valuation satisfied needs and opportunities
wants
• Superior stock • Increased customer • Energized, creative, and • Increased customer
appreciation loyalty, satisfaction, and enthusiastic environment goodwill
commitment
• Higher dividends • Increased employee • Enhanced productivity
satisfaction
• Increased margins and
revenues
• Position in new
categories
• Increased employee
retention
• Better marketing

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First are shareholder benefits. Innovative approaches to markets and product development lead to market leadership and increased stock value. Microsoft's unusual
success is reflected in smaller ways in hundreds of companies every day. The company built a dominant position in its industry in a variety of ways, and technological
superiority was not the most important one. It developed innovative relationships with suppliers up and down the supply chain on one hand and provided extra value to
consumers through aggressive marketing and distribution strategies on the other. The result was extraordinary value for stockholders.
One of Microsoft's chief competitors showed how just a single new product can make a rebound possible. In 1995, Apple Computer's stock sold for about $5 per
share. The company had launched a number of product failures and the future was bleak. Then, four years later, its stock was over $100 per share. The turnaround
was due to the introduction of the iMac, which was a computer user's delight: inexpensive, colorful, and friendly. The company had recaptured the magic of the original
Mac in a product that followed a similarly innovative approach to products and customers.
The most tangible benefit that comes from innovation is increased stock price. Look at anyone's list of "best" companies. As a group, they have enjoyed an average
annual increase of 70.5 percent in stock price versus an increase of 27.1 percent for the Standard and Poor's index (Exhibit 1.2). They sell to different markets with
different propositions, using different types of employees with very different skill sets. But they share at least one characteristic: an innovative mindset that drives an
intense focus on a unique, essential core. Clearly, their ability to innovate successfully has resulted in significant increases in shareholder value. The financial community
is looking for ways to assess a corporation's innovation potential or innovation readiness. There is economic benefit to be realized from innovation. So, the first benefit
layer goes to shareholders in terms of market valuation, dividends, and stock price appreciation.
The second set of innovation benefits is realized by customers. When a new innovative approach, product, or service gives customers a new benefit, their lives are
improved somehow. It might be a here

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Exhibit 1.2 Innovative Corporations and Their Valuations
(1993–1998)
Return (%)
Company 10Year 5Year

General Electric 39.1 34.2
CocaCola 1.3 26.1
Microsoft 114.6 68.9
Dell Computer 248.5 152.9
Berkshire Hathaway 52.2 33.8
WalMart Stores 106.5 27.6
Southwest Airlines 38.4 6.6
Intel 69.0 50.6
Merck 41.3 37.0
Walt Disney 8.5 16.9
Top ten average 70.5 45.4
Source: Dow Jones Interactive
andnow tangible benefit, such as a way to do business more profitably, or it might be more abstract, as in a sense of improved wellbeing. In either case, customers'
''satisfaction quotient" goes up. When a customer finds your product or service outperforms competitive alternatives, or your delivery and service is faster and more
reliable, you gain "loyalty points" with customers. Because it generally costs five to ten times more to attract a new customer than to sell to an existing one, a
company's marketing becomes more effective and efficient.
The third group to benefit from innovation comprises employees and managers. Studies conducted by Kuczmarski & Associates show that four key motivators are
most valued by people who want a career in innovation. They are: (1) a sense of pride and personal accomplishment; (2) peer recognition; (3) senior management
exposure; and (4) career advancement. These compelling benefits mean higher selfesteem and a sense of success for everyone. As their security increases and their
careers advance, loyalty to the corporation expands. Sounds like a winwin situation, doesn't it? Thus, innovation provides both expanded employment opportunities
and increased employee satisfaction. Moreover, it energizes a group of people, making them more

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productive and personally enriched. Enthusiasm to come to work in the morning returns.
Finally, many company benefits accrue from innovation: more sustainable growth; increased margins; more effective and efficient marketing; more dynamic processes;
stronger and more robust positions within categories; increased employee retention; positive public relations; and the ability to redefine the existing business and enter
new markets, segments, and geographies.
Society as a whole also wins. Little more than fifty years ago, diabetes was a death sentence for thousands of people every year. For millions of others, it meant living
on severely restricted terms. Today, with continuing advances in medicine, it is a mere inconvenience for many people who have it. Longer life and better quality of life:
these are just two benefits of innovation.
What's Preventing Innovation?
It isn't as though no opportunity for innovation exists. While Procter & Gamble's Folgers and Philip Morris' Maxwell House toyed with new packaging, upstart Starbucks
Corp. came along and revolutionized the coffee market.
Wall Street Journal, September 16, 1999
Imagine that. Two giant corporations, Procter & Gamble (P&G) and Philip Morris, with massive resources and market clout got sideswiped by an entrepreneur in
Seattle, Washington. With nearly $100 billion in combined revenues and $10 billion in annual profits, these two Fortune 20 conglomerates had plenty of resources for
innovation, if they had chosen to pursue it.
Insufficient resources are rarely the barrier to successful innovation. What if Howard Schultz, the current CEO of Starbucks, had been the president of the coffee
divisions at either P&G or Philip Morris? Would he have successfully launched and expanded the Starbucks brand, product line, and new service experience? Or
would he have been given several reasons why it wouldn't work, why another

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retail coffee concept couldn't succeed, why darker roasting was not what consumers wanted, and why coffee ice cream had no market potential? Probably the latter.
Howard would most likely now be introducing new flavors of coffee in traditional packaging with "new and revitalized" graphics.
Innovation must be seen as a core business strategy. It requires the highest level of commitment and passion by the leaders at the top of an organization to make it
work. It takes a willingness to dramatically change the company culture to one where individuals have high selfesteem and feel as if they have control to make
decisions and take action. It requires an environment that encourages people to take risks.
So, why haven't large corporations been more consistently successful at innovation? What is holding them back? Why can't their culture seem to change to enable
more people to innovate? The answer is relatively simple:
• Innovation is not being treated as a top priority.
• Management hasn't created a risktaking culture or corporate mindset.
• Employees are not encouraged and do not get paid to take risks.
• Adequate resources haven't been allocated for innovation.
The first challenge, then, is not to uncover new sources of funds that can fuel innovation but rather to discover new ways to change attitudes and mindsets throughout
a company. But is it possible for a large multibilliondollar corporation to be innovative? Of course it is, and there are far more excellent examples than might be
immediately apparent. From Lucent, Microsoft, and Dell to Schwab, Sony, and Southwest Airlines, corporate leaders who value the power of innovation insist on
creating a culture that perpetuates and reinforces it.
The really good news is that any corporation can become effective at innovation and, within a twoyear period, be an innovation powerhouse. This can occur, of
course, after management (1) has agreed that innovation will serve as a fundamental growth strategy, and (2) has created a plan, process, and culture that work
together as a system.

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What if your company is one of those that believes acquisitions will better serve your growth strategy? What about it? Regardless of your business strategy, all
corporations need to develop an internal capability to innovate. Saying your company doesn't need innovation would be the same as saying, "We're really an
engineering and manufacturingdriven company, so we don't need any sales and marketing." An even better example may be leaders who ask, "Who needs this quality
thing? Isn't quality something that every employee just needs to make part of his or her job?" Likewise, many corporate leaders have promulgated a similar belief
regarding innovation: "Why can't everyone understand that it's their job to be innovative, to think of new solutions and new ways of doing things?"
Herein lies the key underlying problem preventing many corporations from excelling at innovation. Innovation must be viewed as a separate business discipline. It
needs its own budget, measurements, dedicated people, distinct plan, unique rewards, and specific language to make it stand on its own. It's analogous to information
technology. Virtually everyone within a corporation uses a computer. People interact and communicate through software and Email. Yet, there are also a dedicated
resource base, separate budget, annual plan, and unique language that go along with the management, facilitation, upgrading, and maintenance of information
technology.
The same is true for innovation. Everyone does need to be innovative every day. However, you can't just demand it in the same way you can tell everyone to take a
computer course. People need to be trained, encouraged, and supported; others need to dedicate their fulltime jobs to helping make it work for others. Innovation
needs to be organized as a separate business function. It needs a separate leader—a chief innovation officer or vice president of innovation—who reports directly to
the CEO. It needs a dedicated group of people who lead innovation teams, train others, measure progress, test concepts, lead discussions, and the like. Innovation
needs to shine with its own power source. It needs its own set of "corporate batteries" to provide the energy, consistency, and light required to motivate several
thousand employees within a corporation.

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Risk and Leadership
Too many executives talk at crosspurposes. They say one thing and mean another. Or worse yet, they say one thing and reward another. Managers and employees
walk a fine line between doing what they're told and secondguessing what they've heard. That's why the very first step in creating an innovative culture is being
absolutely clear about its priority. All senior managers must reach consensus and buy into the strategic role that innovation is to play in future growth. They need to ask:
• What do we mean by innovation?
• How will we define it within the walls of our own company?
• Is it breakthrough innovation? Incremental innovation? Radical or discontinuous innovation?
Clarity in the role and priority of innovation sows the seeds for risktaking. If this issue is not addressed clearly, completely, and concisely, the last thing employees will
be willing to do is take risks.
Risktaking is the essential ingredient for all innovation. Without it, companies allocate their resources against a known quantity like their existing product lines. But
who wants to put their career or compensation at risk? So, the environment needs to become conducive to risktaking. Every functional employee should be
encouraged to take risks. It's a risk to hire a new employee, create an aggressive strategic plan, change an accounting method, champion a new product, initiate a new
service, or change the dress code to casual. As General Electric's CEO, Jack Welch, has been heard to say, "Shake it, shake it, break it." The message is to shake up
old patterns or behaviors, break old routines, and begin thinking differently.
For employees to feel a sense of freedom to take risks, two things need to happen. They need to have greater control over their decision making, and they can't be
penalized for failure. Employees need to feel that they are in control rather then believing they are victims, helpless to control their decisions. This means that much
more goal setting needs to be individually driven, as well as bottomup rather

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than topdown. People need to have a sense of pride, a real sense of project ownership, to make it truly "theirs." When people try hard and genuinely attempt to make
a new process, program, or product work, and it fails, just celebrate. That's right. Throw them a failure party to reinforce the corporate commitment to risktaking.
In a similar vein, the way senior management behaves in a crossfunctional team meeting can be either devastating or uplifting. When the team gets the sense that senior
management is on their side, serving as their coach, sponsor, and advocate, you can feel the spirit in the room soar. On the other hand, in many meetings, you can
watch the entire spirit and karma of an innovation team disintegrate and crumble. When a senior manager explains why this new product will "never be a success" and
gives three reasons why it should be killed, the group's spirit is extinguished.
Senior managers need to adopt new behavioral norms and forms of communication. They must clarify their messages to other managers and employees. Recognizing
their role as mentor versus "boss" is a key starting point for freeing up the corporate mindset toward more risktaking. And by the way, senior managers need to take
some risks too. Unless they behave the way they want employees to, it will merely become a "do as I say not as I do" theatric.
Risktaking opens up the mind. It expands the way you currently define a business. It instills selfconfidence and bolsters personal selfworth. When an employee or
team member has high selfesteem, his or her outputs, contributions, productivity, and overall value will be exponentially higher than before. Disciplined freedom, a
term captured in Tom Kuczmarski's first book, Managing New Products, is described as: "A management style or culture that provides a balance whereby
individuals have a sense of entrepreneurship and creativity and receive enough direction and control to guide their efforts."
Achieving this balance is a very delicate and difficult task for corporate leaders. Their natural tendency may be to take control; however, the goal should be to give
control to others, support their taking of it.
So we return to our initial statement that the innovation priority must be clear to let risktaking flourish. When a senior manager says,

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"We need to focus on our strengths," does that mean the company should only launch line extensions? Should it keep marketing its current brands? What if leaders
discover an opportunity that wouldn't leverage its strengths? The words and behavior of the people at the top usually get analyzed, interpreted, and discussed
thoroughly. Management must be perfectly clear on the importance of innovation and what it means to corporate growth.
Innovation takes courage. Businesses have made it through the streamlining and pruningback days. Now it is time for building up, expanding outward, and innovating
across the organization.
Innovation can eventually become a core competency for a corporation. S.C. Johnson & Son, Inc., led by Fisk Johnson, is an outstanding example of an innovative
company. As a consumer packaged goods company with household brand names that include Pledge, Windex, Glade, Raid, and others, millions of consumers use
their products daily. Within the past four years, new products such as Glade Candle Scents, Windex Outdoor, and Pledge Grabit have added hundreds of millions of
revenues to its growth targets. Moreover, with Innovation Centers around the world, it is planning to stay in the innovation leadership position for the long term. While
Fisk Johnson is a profound advocate of innovation, there is a sense of trust and risktaking that permeates this more than $5 billion company. Innovation teams
throughout the company are given permission to take risks and fail. Their key to success is matching technological advancements with customer wants and needs.
Moreover, they've figured out how to do it consistently for decades, which has resulted in profitable growth and endeared an entire employee base to the family
owned corporation.
Don't let innovation lay dormant. Awaken it. What's required is stripping away some old behaviors to revitalize the culture in a way that breeds new mindsets.
Everyone has a fear of failure and rejection. That's normal. But, usually, what people fear most is what they don't understand. Thus, the first step to overcoming fear is
understanding at the most basic level. What if marketing and research and development people really took the time to get to know each other—actually spent time
discovering

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each other's sources of motivation, fears, personal goals, and so on? What about finance, sales, and manufacturing people? Get to know people in other functional
areas and learn their language; ask them to learn yours. Until everyone understands gross rating points, brand development index, runonpress, fluorocarbons, and
protein crystallization, progress on the innovation front will always be uneven and uncertain at best.
Why America Needs Corporate Innovation
While Internet startups and initial public offerings will continue to get loads of media attention and stock market coverage, large corporations need to take on the
mantle of innovation leadership. Why? Because, to turn a phrase, size matters.
The Fortune 1000 corporations generate $6.8 trillion in revenues and employ 28.4 million people annually. The earnings performance of these companies dramatically
influences stock price fluctuations from one day, one month, and one year to the next. The NASDAQ and NYSE are severely impacted when performance from these
giants falls short of expectations. In short, these large corporations represent the bedrock of the national and global economy.
When you consider the potential impact of innovation from these thousand corporations on the world, it becomes almost incalculable—but not quite. Here are a few
numbers. Approximately 30 percent of their total revenue—more than $2 trillion—comes from foreign markets. When one new product is launched globally, it can
easily become a $100 million revenue generator within a couple of years. The sheer scale of the global marketplace provides enormous expansion opportunity for a
new innovation.
Corporate America in 2010
The year is 2010. Managers have recognized their leadership role as mentors, coaches, and champions to marshal the massive resources

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of the corporation around the core strategy of innovating; that is, creating new approaches internally for doing business differently and new mindsets for instilling trust.
Corporations are pounding out innovative new products and services like never before and have regained their status as top jobs sought after by the best business
schools. Employees are proud to be working for their employers. They feel well rewarded, personally satisfied, and highly valued. Employees now want to take risks.
They know that failures are encouraged and all will learn from them.
When you walk into a corporation in the year 2010, here's what you'll see:
• A positive, fun, candoit attitude
• High energy levels among all employees
• Individuals who feel in control of and excited by their jobs
• People who work together as teams instead of alone
• Paychecks fluctuating greatly from one year to the next
• People with high selfesteem
• A lot happening
• Senior management offices in the middle of the workspace, glassed in with doors open
• The chief innovation officer's tenyear contract waiting to be renewed
It is possible to make this scenario a reality. This book's aim is to help corporations reach this state well before 2010.

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